|BUY TO RENT|
Buying to rent requires a very scientific approach to Real Estate. It no longer involves how much we like the kitchen or the views or the building. It is ALL about Return on Investment (ROI) or CAP rate. These calculations are based on the total amount invested, on the expenses (taxes and condo / strata fees) on the mortgage payments if a mortgage is required, and on the rental income of course.
The Downtown Realty Team are a group of Real Estate Brokers who work almost exclusively in the Downtown Montreal area. These areas include the Downtown core, the Old Port or Old Montreal, the South West (Griffintown, Point St Charles, St Henry), Verdun, Westmount and the famouns Le Plateau which has been voted one of North America's trendiest neighbourhoods.
The fact that we work in a smaller area helps us acquire a more intimate knowledge of our market so as to better serve our clientele. We can at a glance, know if a property is well priced or not, and more importantly if it will generate a good rental income in relation to the price.
There are two ways to turn a real estate asset into a good investment.
1. Buy below historical market value
2. Ensure that the lowest probable rental income provides a good return on investment.
Sometimes , the former will necessitate a few renovations but not to worry, we have a qualified overseer in our team and work with good contractors who will ensure to deliver the best product for the best price.
Moving on from the purchase price, the most important aspect of the 'buy to rent' investment property is to ensure that you purchase a unit that will generate an interesting ROI (return on investent).
The R.O.I is not necessarilty based on the purchase price of the property. This calculation is referred to as the cap rate which is the simple division of the price of the property divided by the income generated after substracting all the expenses. The CAP rate is not the most conservat
The real return on investment, or at least the best way to evaluate the value of a piece of real estate as an investment, is to use leveraging (taking advantage of low interest rates to produce a better return). So for that we use the sum used as a downpayment on the property on the basis that it is better to buy four properties with a $100,000 downpayment on each than to buy a single property at $400,000. Over a 5 year period, the difference in your net return on investment would double.
It could be that you are in a position to purchase a property mortgage free, but the best R.O.I will come from a downpayment of roughly 25% with a 75% mortgage. Whilst this will not generate the best cashflow, the R.O.I isn't just calculated on the basis of how much you bring home on a monthly basis but also on how much of the mortgage you have paid. The investment needs to be treated as a limited term investment such as government bonds or guilds.
A typical case scenario would be the purchase of a $300,000 condominium.
Downpayment : $75,000.00
Mortgage: $225,000.00 (25 year amortisation at 3% interest over 5 years)
Monthly mortgage payments are $1,060/month or $12,760/year.
Taxes are $2,600, School taxes are $450 and Condo (Strata) fees are $2,000 (all annually).
Rental income is $1,600/month ($19,200.00/year) which in this price range is a bad scenario and likely to be better.
Your net income after all expenses will be a break even scenario.
However, the main gain is all the invisible income that increases your net worth over the years.
The value of the property should increase by around 2% per year (again a verly low average over a 5 year term) so over 5 years, the capital gains on the property will be $30,000 in that one can reasonably expect the asset to be worth that much more after five years of ownership than the purchase price. All things being equal of course.
Over 5 years, your mortgage balance will go from $225,000.000 to $192,000.00 which is an $33,000.00 increase in value of your equity.
Thats a total of $63,000.00 over 5 years so $12,500.00 annual growth.
The actual ROI is therefore over 15%.
Just so that we know that this is not a 'favourable' figure, it must be pointed out that generating a rental income of $1,600 for a property priced at $300,000 should be very easy to achieve in the current market. The 2% increase in value of the asset is a low average growth rate and the rent will likely increase over a 5 year period.
All these figures are open to greater scrutiny and this is not a typical case scenario that can be applied to any condo purchase in Downtown Montreal but represents what can be acheived by following our advice and knowledge of real estate values for rentals and sale prices in the Downtown Montreal area.
These are the basics, but every model is different and whereas it is possible that in some cases, these figures will appear slightly inflated, most exemples will prove them somewhat conservative. Our expertese lies in being able to select the best possible investment and not to base our calculations on averages which by their very nature, have to include a higher risk margin.
Whats more, if you are willing to wait until a good deal comes on the market, your ROI could be even higher.
If such investments are of any interest to you, please contact us by email or by phone. You may also fill in our inquiry form by clicking here
email : email@example.com
Phone : 1 514 312 4233
Alex Kay . Charles La Haye . Michael Martin
Real Estate Brokers . Courtiers Immobilier
Downtown Realty Team - Equipe Immobilier Centre Ville
REMAX Action inc. Westmount
Bur: (514) 364.3222 Fax : (514) 364.0743
8280 Boul. Champlain, LaSalle, H8P1B5